7/31/2019 55291Subhiksha

1/2

Subhikshas Last Chance(Businessworld Issue Dated 24 February-02 March 2009)

Lesser stock on display racks in your neighbourhood Subhiksha, and may havestarted going elsewhere instead. One fine day, you may have even noticed thatthe shop was shut. What happened was this: Chennai-based value retailerSubhiksha Trading Services, neck-deep in Rs 600 crore of debt (plus Rs 180crore raised internally as shareholders funds) accumulated over the past threeyears, could not pay its vendors as all its earnings was going to service the debt.So, over the past six months, it temporarily shut all 1,600 of its outlets in 110cities.

Yet, till recently, Subhikshas managing director and promoter, R. Subramanian,was thinking of expansion. I will add another 2 million sq. ft by the end of thefourth quarter of 2009, he had told BW in December 2008, a move that wouldhave raised his store count to 2,200 for an additional Rs 1,000 crore. Today, thecompany is on the threshold of a closure it has no money to run its operations,its senior staff are deserting, many of its stores have reportedly been looted, andthe government may initiate an independent audit of accounts at the instance ofICICI Ventures, the second-largest shareholder with 23 per cent stake.

However, Subramanian has not given up. Firm in the belief that Subhiksha can

still be a viable business, he is making a last-ditch effort to survive by pitching fora Rs 300-crore loan from a consortium of 13 banks, besides attempting a debtrestructuring exercise. In a letter sent to BW, Subramanian says, The infusion ofRs 300 crore would revive Subhiksha soon. That would allow him to pay off thevendors and resume operations at a minimal level, though he might also have toshell out a significant chunk of his 59 per cent stake. Subramanians confidencestems from his belief that his business model is viable. We did not raise enoughequity, and we paid the price, he says. It was a capital structure problem rather

7/31/2019 55291Subhiksha

2/2

than a business model problem.

Analysts agree that Subhikshas low-cost model was sound. They blame thecompanys troubles on its rapid expansion with debt capital to open 800 stores ina year. Although the same store sales were as high as Rs 12,500 per sq. ft

during the first few months of 2008, the debt taken on a number of new storesand the financial crisis put paid to Subhikshas exuberance. The industry averagefor stores of 2,000 sq. ft (Subhikshas typical store size) to break even is Rs5,000 per sq. ft, and analysts say that Subhikshas new stores never achievedbreak-even levels.

The desire to expand at breakneck speed is not typical of Subhiksha alone. Allretailers have read the Indian market wrong, says Devangshu Dutta, who runsretail consultancy Third Eyesight in Delhi. There was no prudence; (there was amismatch) between what the real consumer demand was and the number ofstores opened. Pinakiranjan Mishra, partner of retail and consumer product

practice at Ernst & Young, says, Retailers have spread themselves too thin tobenefit from scale.

The Rs 300-crore and the restructuring may help Subhiksha revive, but only if itcloses at least 40 per cent of its stores. That may keep it afloat, but would bedisastrous for a company that fundamentally offers low prices and relies heavilyon high volumes for better discounts from consumer companies.

(Businessworld Issue Dated 24 February-02 March 2009)